What is a taxable distribution?

Question

i am withdrawing money from my 401k account. i borrowed money against it sometime ago. the information sent to me states that i can choose to not re-pay the loan but it will be reported as a taxable distribution. what does this mean?

Answer 1

it  means that next year when you file your tax return you will probably owe.  so start saving you money to pay IRS.

Answer 2

It means that if you re-pay the loan, you will restore your contributions to your 401k that you borrowed.  If you do this, you will not have to pay income tax until you take money out of the 401k as a distribution.

However, if you do not repay the loan, the loan converts to a distribution, and you will pay income tax on the full amount of the remaining loan in the year the loan converts to a distribution (the year you stop paying).  You will be issued a tax document showing the amount that hasn't been repaid, and is therefore taxable.  This document is also sent to the IRS (Form 1099R).

Answer 3

A taxable distribution means that the loan amount that you did not pay back as agreed will be treated like you just withdrew it rather than taking a loan.  You'll pay income tax on it at whatever your rate is, plus a 10% penalty for early withdrawal if you are under age 59-1/2.

Answer 4

All the value in your 401k when withdrawn becomes a taxable distribution which means just taxable income. It is not just the interest that is taxable but the whole amount in the fund when distributed to you.

When you borrow against that 401k, they defer calling that a distribution as long as you keep up with the payment on the loan.

It can be a good strategy to borrow from someone else to keep the payments up to date on 401k loan. The tax is likely bigger than the interest from a bank.

Answer 5

It means that the loan will converted to a withdrawal - which is taxable income.